31559 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Improving The Business Environment in East Java Improving The Business Environment in East Java Views From The Private Sector i i 2 Improving The Business Environment in East Java TABLE OF CONTENTS FOREWORD | 5 ACKNOWLEDGMENT | 6 LIST OF ABBREVIATIONS | 7 LIST OF TABLES | 9 LIST OF FIGURES | 10 EXECUTIVE SUMMARY | 11 I. BACKGROUND AND AIMS | 13 II. METHODOLOGY | 17 Desk Study | 19 Survey | 19 Focus Group Discussions | 20 Case Studies | 22 III. ECONOMIC PROFILE OF EAST JAVA | 23 Growth and Employment | 24 Geographic Breakdown | 27 Sectoral Breakdown | 29 East Java’s Exports | 33 IV. INVESTMENT AND INTERREGIONAL TRADE CONDITIONS IN EAST JAVA | 35 Investment Performance in East Java | 37 Licensing and Permitting | 40 Physical Infrastructure | 43 Levies | 45 Security | 48 Labor | 50 V. COMMODITY VALUE CHAINS | 53 Teak | 54 Tobacco | 63 Sugar cane and Sugar | 70 Coffee | 75 Salt | 82 Shrimp | 90 Beef Cattle | 95 Textiles | 101 VI. CONCLUSION AND RECOMMENDATIONS | 107 Conclusions | 108 General Recommendations | 109 Sectoral Recommendations | 111 APPENDIX I Conditions Of Coordination Between Local Governments Within East Java | 115 Bibliography | 126 2 3 4 Improving The Business Environment in East Java FOREWORD As decentralization in Indonesia unfolds and local governments assume increased responsibility for develo- ping their regions, it is encouraging to see positive examples around the country of efforts to promote eco- nomic cooperation among local governments and solicit private sector participation in policymaking. East Java Province is one such example. This report is the product of a series of activities to address trade and investment barriers and facilitate the initiation of East Java Province’s long-term development plan called Strategic Infrastructure and Develop- ment Reform Program (SIDRP). SIDRP is based on four pillar programs in infrastructure, local economic development, poverty alleviation, and governance. The East Java government, recognizing the importance of improving the business environment for regional development, has initiated SIDRP as an opportunity to engage the private sector. The World Bank and The Asia Foundation support this initiative and we are very pleased to be able to assist the government in this important process. Beyond this initial step, the World Bank is currently working with the Provincial government on identifying infrastructure projects to support, and The Asia Foundation is active in advocating reduced domestic trade barriers and red tape faced by the private sector. The input of the private sector, from micro entrepreneurs to large businesses, is invaluable in helping the government formulate appropriate economic policy. This report contains numerous illustrations from the private sector perspective on the barriers to growth they face, including what infrastructure hinders growth and access to market, which regulations are obstacles to domestic trade, and how to better target government assistance. The Asia Foundation and the World Bank jointly conducted discussions with around 650 busi- ness operators throughout East Java to obtain these views. We trust that these inputs will be incorporated in SIDRP action plans to improve the business climate in East Java. The recommendations are also important for local governments (city/district) in East Java as they work to foster business environments that create jobs and attract investment. On June 1, 2004, the World Bank and The Asia Foundation, in collaboration with the East Java Provincial Government hosted the East Java Forum for Conducive Investment Climate and Trade. The Forum was opened by Governor Imam Utomo and Coordinating Minister for Economic Affairs, Dorodjatun Kuntjoro- Jakti. Local governments and businesses from 38 cities and regencies, NGOs and other donor agencies were in attendance to discuss the findings in this report, affirm commitment to cooperate among the local govern- ments to reduce domestic trade barriers, and elect private sector representatives who will become members of the working groups in SIDRP. The World Bank and The Asia Foundation team would like to sincerely thank all private sector participants who took part in the discussions for their time and invaluable insights. We acknowledge that time is of the essence for dynamic businesses, and hope that their continuing contribution in the SIDRP process and other policy dialogue venues yield improved investment climate and the advancement of East Java region. Erin Thébault Weiser, P.S. Srinivas Director, Economic Program Finance & Private Sector Coordinator The Asia Foundation The World Bank, Indonesia 4 5 ACKNOWLEDGMENT This report was prepared by a core team led jointly by Bido A. Budiman (The Asia Foundation) and Megawati Sulistyo (the World Bank), and consisting of: Frida Rustiani, R. Alam Surya Putra, Haryunani Kumoloraras, Harry Seldadyo, Indra N. Fauzi, and Ferry D. Latief. Production support was provided by Siti Aisyah Purnamasari. We would like to thank each and every one of the private entrepreneurs throughout East Java who took the time and effort to participate in individual interviews, focus group discussions, and the business climate survey. Special thanks to the Department For International Development (DFID) and U.S Agency for International Development (USAID) for financial support for this project. We are grateful to our colleague Andre Bald (the World Bank) for reviewing the report. Editors: Erin Thébault Weiser (The Asia Foundation) and Megawati Sulistyo (the World Bank). DISCLAIMER This volume is a product of the staff of the World Bank and The Asia Foundation, however, the opinions, findings, interpretations, and conclusions here in are those expressed by entrepreneurs in East Java. They do not necessarily represent the views of the World Bank and The Asia Foundation. 6 Improving The Business Environment in East Java LIST OF ABBREVIATIONS APEKSI All Indonesia Association of City APKASI All Indonesia Assciation of Regency Governments APTR Smallholders Sugar Cane Farmers Associations BAPPENAS National Planning Body Bakorwil Regional Coordination Agency BKPM Investment Coordination Agency BPS Central Statistical Bureau BPDE Electronic Management Agency BPP Directorate General for Guidance of Plantation Production BPN National Land Agency BUMN State-owned Companies DAU General Allocation Fund DLLAJ Highway Traffic Service DPKK Manpower Skill Development Fund DPOD Regional Autonomy Advisory Council DPPM Capital Investment and Permitting Service FGD Focus Group Discussion GDP Gross Domestic Product GPP Category of Factory Entrepreneur GRDP Gross Regional Domestic Product HAKI Intelectual Property Rights HO Nuisance Permits HPH Forest Concession Permits ITKA Expatriate Work Permits IUI Industrial Business Permits IUT Permanent Business Permits KPH Forest Management Unit MoU Memorandum of Understanding 6 7 LIST OF ABBREVIATIONS NGO Non-Government Organization OSS One Stop Service PAD Local revenues PBB Local taxes on land PDRB Gross Regional Domestic Product PDP Regional-Owned Plantation Company Perda Regional Regulation PG State owned Sugar Plantation Company PLN State-Owned electricity Company PMA/PMDN Foriegn / Domestic Investment Company PTPN State Plantation Company P3GI Indonesian Sugar Plantation Research Center SIDRP Strategic Infrastructure and Development Reform Program SIPA Water use permit SIUP Trading Business Permit SKM Machine-rolled kretek SKT Hand-rolled kretek SKSHH Certificate of Legality of Forest Products SME Small Medium Enterprises SOE State Owned Enterprises SPAP Purchase Allocation Orders SPM Machine-rolled non- kretek SPT Hand-rolled non-kretek SPP Purchase Orders SIP Purchase Permits UMK Regional Minimum Wages VAT Value Added Tax 8 Improving The Business Environment in East Java LIST OF TABLES Table 1.1 East Java Development Indicators | 16 Table 2.1 Data Gathering Methods and Types and Sources of Information | 18 Table 2.2 Respondents by Value of Business Turnover/ Year | 20 Table 2.3 Numbers of Respondents’ Personnel (N = 103) | 20 Table 3.1 Economic Sectors in Each Regency and City by Corridor | 28 Table 3.2 Levels of Backward and Forward Linkages | 31 Table 3.3 Value of East Java’s Exports and Imports, 1997-2002 | 33 Table 4.1 Costs for Obtaining Permits (in Rp thousand) | 42 Table 4.3 Regional Minimum Wage (UMK) in East Java, 2003 and 2004 (Rp/month) | 51 Table 5.1 Capacity of Wood and Other Forest Products Processing Industry and its Utilization | 55 Table 5.2 Plantation Area and Tobacco Production of the Five Largest Producing Regions in East Java, 2000 – 2002 | 64 Table 5.3 Exports and Imports of Tobacco in Indonesia, 1990- 2000 | 67 Table 5.4 Production and Export Value of Indonesia’s Coffee Plants, 1996 – 2001 | 76 Table 5.5 Export Price of Coffee | 76 Table 5.6 Distribution of Coffee by Region in East Java, 1998 | 77 Table 5.7 Salt Production in Indonesia | 83 Table 5.8 Salt Areas and Salt Production in East Java, 2003 | 84 Table 5.9 The Iodized Salt Industry in East Java | 85 Table 6.1 Division of Regional Coordination Agencies (Bakorwil) in East Java | 116 8 9 LIST OF FIGURES Figure 1. Map of East Java | 15 Figure 2.1 Structure of FGD Discussions | 21 Figure 3.1 Comparison of Rates of Economic Growth, 1998-2002 | 24 Figure 3.2 Contribution to GRDP by Sector | 25 Figure 3.3 Economic Growth by Sector | 25 Figure 3.4 Sectoral Distribution of East Java’s GRDP, 2002 | 26 Figure 3.5 GRDP by Business Sector